National Energy Guarantee: What we do and don’t know about how it will work

Business and industry groups could back the proposed National Energy Guarantee if it provides investment certainty.

When Prime Minister Malcolm Turnbull announced the National Energy Guarantee (NEG) in October, he called it a game-changer: it would keep the lights on and provide affordable electricity; meet Australia’s international commitment to reduce emissions by 26-28 per cent of 2005 levels by 2030 under the Paris agreement; and create a long-sought resolution to the energy trilemma of balancing sustainability, customer demand and cost.

The Government plans to adopt the NEG instead of the Clean Energy Target (CET) recommended by Chief Scientist Dr Alan Finkel in his June report: Independent Review into the Future Security of the National Energy Market.

The Finkel Report was commissioned in 2016 in response to issues including a blackout across South Australia during extreme weather conditions; the closure of the Hazelwood power station in Victoria; and an energy crisis in Tasmania caused by low water levels to power its hydro generation, paired with a breakdown in the underwater cable that links the island state to the national grid.

The CET was intended to help the electricity market transition to a low carbon future by setting a known level of clean energy to encourage growth. Finkel also recommended that large generators be required to provide three years’ notice of closure.

The NEG proposes two guarantees to be delivered by energy retailers: a reliability guarantee, which requires contracts between electricity retailers and large users for dispatchable energy; and an emissions guarantee, which limits retailers and high users to average emissions levels which are yet to be specified.

Energy retailers AGL, Origin and Energy Australia have expressed qualified support for the NEG, especially if it gains bipartisan political approval.

At time of writing, the National Energy Guarantee is awaiting approval by the Coalition of Australian Government (COAG) and detailed modelling to clarify how it be implemented and what it will achieve.

The need for bipartisan support

The energy trilemma has been a key point of disagreement for Australian politicians over the past decade.

This has deprived the electrical energy industry of effective policy incentives and investment certainty to build the power stations needed to provide capacity to replace coal-fired plants reaching the end of their lives.

Mark Lendich, the Chair of Engineers Australia’s Electrical College, believes that the NEG could be a potential solution, depending on further details and modelling which are yet to be released.

“The core issue is policy stability and bipartisan support,” he said.

“Energy is one area where this has been problematic for some years. Labor often supports higher renewable energy penetration than the Government. There are different issues in different states, and then there are the Paris commitments.”

Lendich stresses the need for a long term, stable policy to make sure that generators building assets such as power stations will have the framework to support them over their lifecycle. “Many assets are not around for five years, but for decades and decades,” he said.

Another factor crucial to the ongoing stability of the electricity grid is ensuring professional power systems engineering experience is represented on the boards of the Australian Energy Market Operator (AEMO) and other market bodies, as recommended by the Finkel report, Lendich said.

Has Western Australia got it right?

The NEG is not a truly national guarantee. It applies to the National Energy Market (NEM), a

5000 km-long network of transmission lines which links Victoria, New South Wales, the Australian Capital Territory, South Australia, and Tasmania. Western Australia and the Northern Territory are not connected.

The NEM is an energy-only market: it trades in the energy units that consumers are billed in: kilowatt hours (kWh) or megawatt hours (MWh). WA has a completely different market, which trades in capacity – the ability of the system to provide the power to meet customer demand, especially at times of peak usage. This is measured in megawatts (MW).

According to Dr Robert Barr, National President of the Electric Energy Society of Australia (EESA), a capacity market could provide the market signals needed to encourage generators to build power plants with the lead time needed to maintain system stability and keep prices down.

This is achieved in WA by retailers making regular capacity payments to generators to finance the fixed costs of building new power stations. They only need to recover the short-run marginal costs from the energy part of the market, which is capped to around $350 per MWh.

“Customers won’t get wiped out financially and generators won’t make big windfalls. I think this model would promote more competition in the NEM. We should look very closely at what they are doing in WA, they don’t have the dispatchable capacity shortages of the east coast,” Barr said.

The United Kingdom also operates a capacity market. Payments to ensure 54 GW of generation capacity began in September.

The current NEM model has a scarcity band, which is intended to send a price signal to encourage generators to build new dispatchable plants when energy levels are below demand. This also has the effect of sending energy prices soaring to between $350 and $14,200 per MWh when there is not enough power. Barr is critical of this mechanism because the pricing signals arrive too late for investors to fill the gap.

“The NEM gives signals to invest in new power stations after it’s all over. You need a mechanism to make sure as one power station goes out another comes in. From what I understand of the NEG, it has some features similar to the WA capacity market,” he said.

An optimal mix

The reliability guarantee will require retailers and high power users to contract for dispatchable power – which can be brought online at short notice to keep the system stable in a crisis.

One issue South Australia faces is the proliferation of intermittent renewables, such as wind and solar, without storage to provide extra capacity to restore system stability. Following the 2016 blackouts, the State Government took up the offer of Elon Musk, CEO of Tesla, to install battery storage for renewables to increase their dispatchable reserve.

Keith Lovegrove, Managing Director of ITP Thermal, says that if the NEG is implemented in an optimal way, it has the potential to encourage dispatchable renewable technologies such as concentrating solar thermal (CST), which uses molten salt to store dispatchable solar energy.

“The best idea is that we put a requirement on retailers so that the mix of energy they procure actually becomes optimal,” he said.

The construction of a $650 million, 150 MW CST plant will begin in Port Augusta next year, to go online in 2020. This will be the country’s first utility scale CST plant.

Tidal power is another technology that can provide dispatchable power. A $5.85 million project, led by the Australian Maritime College at the University of Tasmania, is currently mapping Australia’s tidal energy to help make it available to the market. According to Barr, over-enthusiasm for intermittent renewable generation has put the NEM badly out of balance.

“We have over-incentivised investment in intermittent renewables to the detriment of dispatchable capacity. What we need to do is get the balance between dispatchable generation and intermittent generation back in equilibrium. We need to source more natural gas and lift the energy efficiency of future fossil fuel generators. The National Energy Guarantee can be the mechanism to achieve this – we look forward to seeing the detail,” he said.

What’s missing from the National Energy Guarantee?

Detailed modelling, mechanisms and target trajectories to support cost and emissions reduction forecasts.

Measures for non-electrical energy sources such as liquid fuels, gas and nuclear.

A definition of dispatchable energy capacity and how it would be implemented in what is currently an energy-only market.

Mention of the inertia requirements (energy produced by synchronous generators such as coal-fired, gas-fired, or concentrating solar thermal) needed for system stability.

A transition plan to a low carbon energy market (as proposed in 2017 Engineers Australia publication The Future of Australian Energy Generation).

Implementation of the recommendations of the Finkel review to appoint power system engineering professionals to AEMO and other energy boards.

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Nadine Cranenburgh is an electrical engineer with postgraduate qualifications in environmental engineering, and professional writing and editing. She works as a freelance writer and editor specialising in complex topics that draw on her experience in the engineering, local government, defence and environment industries.

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